Exchange Rates

How many pesos can you buy with one dollar? This kind of question illustrates the concept of exchange rates.

The more you can buy, (dollars appreciated) the more import prices fall and export prices rise. That means that foreign imports are more affordable to domestic purchasers and our products are less affordable abroad.

On the other hand, when the dollar depreciates, the reverse happens. So, it follows that the best way to help our foreign trade is to devalue the dollar to the lowest, possible, right? Wrong. The less value the dollar has, the more dollars it takes to buy things. This is also known as inflation.

In the USA, the dollar’s exchange rate floats on the open market. I once had to do bank reconciliations of amounts held in foreign banks in foreign denominations and compare to transfers to and from U.S. banks in dollars. It was a headache! The exchange rate fluctuates.

The concept of foreign exchange is critical in international business.